Financial borrowing by local state-owned enterprises in Serbia : an assessment of national practice

Serbian local state-owned enterprises (SOEs) owed in excess of EUR 220mn in late 2015, with estimates reaching a much higher figure. According to the national Fiscal Council, underinvestment by local governments amounted to some EUR 250mn annually. This paper looks at insufficient commercial borrowing by local SOEs trying to identify the causes of this financing gap by looking at two aspects: on one hand, we look at quantitative and qualitative inputs provided by local SOEs for credit analysis that may cause significant information asymmetries, and, on the other, we consider the possibility that bank credit analyses, even if done properly, could reveal that these firms are unable to borrow from banks. The research has revealed that the length and efficiency of the bank credit approval process is dictated by: the need to properly organise qualitative and quantitative SOE information and ensure that it reflects the actual state of affairs; the poor quality of financial statements of SOEs and their pro forma annual business planning and reporting; a common lack of appropriate revaluation of future income; and an existent drawback related to ownership over fixed assets that are considered as a public property in Serbia (rather than as a property of the SOE that uses them). On the other hand, banks do not distinguish sufficiently between private firms and SOEs. This does not allow banks to account for issues specific to SOEs such as the spillover of fiscal risk, corporate governance, relationships between the owner and its SOEs, economic and social objectives, and the like. The frequent inability of local SOEs to provide mortgages as collateral, coupled with the restriction on guarantees from local governments, nearly completely preclude lending for large-scale and long-term investment. We conclude that local SOEs have a limited access to finance due to information asymmetries caused by unsuitable qualitative and quantitative inputs made by SOEs in the credit analysis process. Nevertheless, appropriate credit analyses reveal that these companies can be able to borrow commercially, especially in lower amounts and at shorter maturities which could mitigate underinvestment by local SOEs.